The Germinator

The Germinator

Companies by Jean Gruss | Editor/Lee-Collier

There's more to Florida agriculture land than citrus and cattle. Agribusiness giant Alico offers a lesson in creative diversification.

John Alexander reaches behind a chair in a corner of Alico's boardroom in LaBelle and brandishes a piece of sugarcane the width of a small oak tree.

What looks like sugarcane on steroids is actually "energy cane" and it may be the newest source of fuel for your car. Alico, the agribusiness giant headquartered about 30 miles east of Fort Myers, has applied for an $80 million grant from the U.S. Department of Energy to build an ethanol plant. Energy cane may be its best source of fuel. The company hopes it will be selected when the energy department announces three grant recipients in January.

The ethanol plant is part of Alexander's strategy to diversify Alico's operations from the highly volatile citrus business. Alexander, who took over as chairman and chief executive officer of the company after heirs of citrus magnate Ben Hill Griffin Jr. settled a family dispute in 2004, has made risk mitigation, efficiency of existing operations and diversification his top priorities. "You've got to have a vision," he says.

Besides planning an ethanol plant, Alexander also is exploring residential real estate ventures and other potentially lucrative crops such as ornamental plants and native grasses. Alico owns about 136,000 acres in Collier, Hendry, Lee and Polk counties on which it grows citrus, sugarcane, sod and vegetables. It also raises cattle and mines rock and sand.

Alexander has been on a hiring spree for top talent. In March, Alico named Dan Gunter as its new president and chief operating officer. Gunter is the former executive director of the Florida Department of Citrus. In July, Alico hired Michael Rosen as its vice president of real estate. Rosen most recently oversaw the Southwest Florida operations of DiVosta Homes, the luxury home subsidiary of building giant Pulte Homes.

Meanwhile, in 2004, Alico formed a subsidiary called Alico Plant World and purchased the assets of a LaBelle-based wholesale grower and shipper of vegetable transplants to commercial farmers. It also bought citrus harvester and marketer Bowen Brothers Fruit Co. in February for $1.9 million to make its citrus operations more efficient.

The company has rebounded strongly from Hurricane Wilma's devastation in 2005, reporting net income of $6.3 million for the nine months of 2006, which compared to the same period a year ago is a 78% increase. Operating revenues were $63 million in the same period, a 36% increase.

Although the stock is not widely followed (the heirs of the Griffin fortune control about half the shares), the stock's price has nearly doubled since 2004 to a recent price of $61 a share (symbol: ALCO). Alexander's compensation totaled $281,094 in 2005, according to proxy filings.

Citrus a core focus

About half of Alico's revenues and profits come from its core citrus operations. But the crop has become a volatile commodity that has been buffeted by hurricanes, tree-destroying diseases such as canker and greening, and fierce competition from countries such as Brazil.

Although Alico seeks to diversify its operations so that its revenues and profits are not inextricably tied to citrus, it is still investing in that business to make it run more efficiently and be even more profitable. In February, Alico bought Bowen Brothers Fruit to help it harvest and market its own citrus and that of other growers.

Alexander says Bowen Brother' president, Jim Shuford, 65, brings unparalleled expertise in managing the company's 16,884 acres of citrus groves. The company uses computer modeling to tell grove managers when to pick fruit to capture the maximum yield and how to manage labor to do that. Shuford's three-year contract with Alico stipulates that he'll share his expertise and train younger managers in his techniques. "What I was after was getting Jim Shuford's expertise," Alexander says of the acquisition.

What's more, Bowen Brothers can harvest other groves. This season, they'll harvest 4 million boxes for Alico and another 4 million boxes for other growers.

Vegetables, orchids and bougainvilleas

Although the citrus operations promise to be more efficient with the acquisition of Bowen Brothers, Alexander says revenues and profits are volatile because of weather, disease and other factors.

To diversify, he's launched efforts to grow vegetables, grasses and ornamental plants that can grow in greenhouses throughout the year. Alico Plant World's 50 greenhouses are home to seedling tomatoes, watermelons and peppers that will eventually be sold to commercial farms in 11 states.

It's a vast operation on 40 acres on the outskirts of LaBelle in Hendry County. Each greenhouse is 300 feet long by 36 feet wide. The company shipped nearly 70 million plants last year with its fleet of specially designed trucks.

Although Plant World delivered just 5% of Alico's operating revenues in 2005, the operation is the company's fastest-growing segment on a percentage basis. Plants and forest-product revenues grew 592% from 2004 to 2005. For the first nine months of this year, that segment is already up another 123% over the same period last year.

In addition to vegetables, the company is exploring new plants to grow such as orchids, bougainvilleas, native grasses and even sea oats to help stabilize Florida's 900 miles of sand dunes. The great thing about plants such as orchids is that they can be grown year-round in temperature-controlled greenhouses and sold to nurseries and garden centers. By contrast, vegetables and citrus are seasonal. "That's a totally different business cycle," Alexander says.

Homes and ethanol plants

Not all of Alico's 136,000 acres are best suited for agriculture. That's why the company is exploring possible residential developments and Alexander hired DiVosta's Rosen to do that. "His job is to develop a recommendation for the land's highest and best use," Alexander says.

While Alexander is mum about future residential plans, Alico recently bought 291 acres on Crooked Lake near U.S. 27 and County Road 640 in Polk County for $9.2 million that would be prime location for a residential community. It also bought 523 acres of riverfront mining property in Hendry County for $10.6 million.

Residential development is a departure for Alico, which has sold land to residential and commercial developers over the years. Most recently, the company sold 280 acres of citrus groves to an undisclosed developer south of LaBelle for $5.6 million and will retain operating rights to the groves until residential development begins. It also has contracts to sell land in Lee County totaling $131 million and the deals are scheduled to close in phases starting next year.

Meanwhile, Alico is one of three companies vying for a portion of a $160 million grant by the energy department to build and operate an ethanol plant. The initiative is part of President Bush's plan to reduce the country's dependence on foreign oil.

Alico hired Joseph Ahrens, a former senior engineer with agribusiness powerhouse Green Giant, to help it find the right fuel for an ethanol plant. "He's a scientist who knows how to make money," Alexander says of Ahrens, who is now Alico's executive director of agriculture enterprise development and technology.

Replacing Alico's sugarcane fields with energy cane to fuel an ethanol plant would be a good thing. That's because government quotas and lower sugar prices have resulted in lower revenues for that business segment. The sugarcane and sod segment posted a 22% decline in 2005 versus the prior year. However, Ahrens cautions that converting energy cane to ethanol on such a large scale has not yet been tested and that other fuels might produce better results.

Alico has the resources to figure that out, though. As of May 31, the company had nearly $89 million in working capital. In addition, the company can borrow another $124 million from Farm Credit of Southwest Florida Bank.

A LESSON ABOUT SELF-INSURANCE

Executives who are thinking about self-insuring their businesses after seeing their premiums spike may want to consider Alico's experience. Although extreme, the Hendry County agribusiness giant's case is a warning to any business manager or owner who is considering going that route.

Self-insurance certainly seemed like a good idea back in 2000. Alico formed a Bermuda-based insurance subsidiary in June of that year called Agri Insurance Co. because it couldn't find anyone to write premiums for citrus diseases and hurricanes.

Besides insuring its own citrus operations, Alico planned to insure some of its business partners, as it was able to attract capital from reinsurance companies.

Alico capitalized Agri by contributing Lee County real estate at its historically low basis. Agri received a letter from the Internal Revenue Service stating that the insurance company would be exempt from taxation provided that net premiums from other companies it insured remained below $350,000.

As Agri sold the Lee County real estate, it created substantial gains. According to the IRS' initial letter, those gains were not taxable.

However, according to Alico's filings, the IRS took another look at the deal in 2004 and decided earlier this year that the value of the assets transferred from Alico to Agri should have been taxed at their fair market value at the date of transfer. What's more, the IRS has proposed that Alico should pay penalties on the unpaid taxes.

The potential bill could range between $39.4 million $82.3 million, a huge sum considering the company's operating revenues in 2005 were $56 million. And that amount doesn't even include interest on the taxes.

Although Alico Chairman and CEO John Alexander declines to comment because of the ongoing dispute with the IRS, the company has said it will vigorously fight the assessment.

- Jean Gruss

AT A GLANCE

Alico Inc.

Headquarters: LaBelle, Hendry County

Chairman and CEO: John Alexander

Market capitalization: $450 million

Recent stock price: $61

Price-earnings ratio (trailing 12 months): 51

Dividend (yield): $1.10 (1.8%)

Source: Yahoo Finance

By the numbers

ALICO INC.

INCOME STATEMENT

Nine months ended May 31 (in thousands)

2005 2006 %Change

Revenue:

Citrus 20,711 42,250 104%

Sugarcane/sod 9,641 9,922 3%

Cattle 8,979 3,408 ?62%

Plants, vegetables & trees 2,413 5,384 123%

Rock & sand royalties 2,596 662 ?74%

Oil lease & land rentals 1,253 1,095 ?13%

Retail land sales 755 113 ?85%

Operating revenue 46,348 62,834 36%

Cost of sales:

Citrus production,

harvesting & marketing 15,431 35,435 130%

Sugarcane/sod production,

harvesting & hauling 9,100 9,327 2%

Cattle 7,169 2,700 ?62%

Plants, vegetables & trees 1,950 5,159 165%

Retail land sales 306 58 ?81%

Casualty loss 408 2,768 578%

Total cost of sales 34,364 55,447 61%

Gross profit 11,984 7,387 ?38

General & administrative expenses 7,905 7,556 ?4%

Income (loss) from operations 4,079 (169)

Other income (expenses):

Sale of real estate 31 5,555 17,819%

Cost of real estate sold 0 1,162

Net profit on sale of real estate 31 4,393 14,070%

Interest & investment income 2,738 8,135 197%

Interest expense (1,762) (2,839)

Other 531 231 ?56%

Total other income, net 1,538 9,920 545%

Income before income taxes 5,617 9,751 74%

Provision for income taxes 2,048 3,391 66%

Net income 3,569 6,360 78%

BALANCE SHEET

8/31/2005 5/31/2006 %Change

ASSETS

Current assets:

Cash & cash equivalents 13,384 21,055 57%

Marketable securities available for sale 70,824 21,055 ?70%

Accounts receivable 11,216 15,503 38%

Mortgages & notes receivable, current portion 2,370 51 ?98%

Inventories 20,902 19,603 ?6%

Deposits in escrow 6,812 0

Land held for development & sale 1,809 1,261 ?30%

Prepaid expenses 1,660 439 ?74%

Total current assets 128,977 109,322 ?15%

Mortgages & notes receivable,

net of current portion 6,395 10,771 68%

Investments & deposits 692 3,088 346%

Cash surrender value of life insurance 5,676 5,766 2%

Property, buildings & equipment 150,997 177,855 18%

Less: accumulated depreciation (45,043) (46,510)

Total assets 247,694 260,292 5%

LIABILITIES AND STOCKHOLDERS' EQUITY

Current liabilities:

Accounts payable 2,180 6,262 189%

Current portion of notes payable 3,309 3,312

Accrued expenses 3,588 3,770 5%

Insurance claims payable 1,404 0

Dividend payable 1,842 1,842

Accrued ad valorem taxes 2,008 1,301 ?35%

Retirement benefits payable 432 637 47%

Deferred income taxes 2,280 2,928 28%

Current portion of donation payable 776 781 1%

Total current liabilities 17,819 20,833 17%

Notes payable, net of current portion 48,039 59,845 25%

Deferred income taxes 13,424 12,941 ?4%

Deferred retirement benefits 4,376 4,162 ?5%

Commissions payable 2,125 2,833 33%

Other non-current liability 16,954 16,954

Donation payable 771 0

Total liabilities 103,508 117,568 14%

Total stockholders' equity 144,186 142,724 ?1%

Source: Securities & Exchange Commission filings.